<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-21958
QRS CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 68-0102251
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1400 MARINA WAY SOUTH, RICHMOND, CA 94804
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(510) 215-5000
- --------------------------------------------------------------------------------
(Registrant's phone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X YES NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASSES OF COMMON STOCK SHARES OUTSTANDING AT SEPTEMBER 30, 1999
- --------------------------- ----------------------------------------
Common Stock, $.001 par value 13,520,826
This document contains 18 pages.
The Exhibit listing appears on Page 17.
<PAGE>
QRS CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER ----
- ------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998......................... 3
Consolidated Statements of Earnings and Comprehensive Earnings for the Three
And Nine Months Ended September 30, 1999 and 1998.................................................. 4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999
And 1998........................................................................................... 5
Notes to Consolidated Financial Statements......................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations......................................................................................... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk......................................... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................. 17
Item 2. Changes in Securities and Use of Proceeds.......................................................... 17
Item 3. Defaults upon Senior Securities.................................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders................................................ 17
Item 5. Other Information.................................................................................. 17
Item 6. Exhibits and Reports on Form 8-K................................................................... 17
Exhibits
A. Reports on Form 8-K
SIGNATURES.................................................................................................. 18
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QRS CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
------
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................... $26,625 $36,642
Marketable securities available for sale..................................... 13,464 6,976
Accounts receivable-net of allowance for doubtful accounts of $1,138 at
September 30,1999 and $1,036 at December 31,1998........................... 20,966 19,059
Deferred income tax assets................................................... 816 816
Prepaid expenses and other................................................... 1,547 1,179
------------- -------------
Total current assets..................................................... 63,418 64,672
------------- -------------
Property and equipment:
Furniture and fixtures....................................................... 2,963 2,476
Equipment.................................................................... 14,131 9,133
Leasehold improvements 3,564 2,249
------------- -------------
20,658 13,858
Less accumulated depreciation................................................ 8,666 5,708
------------- -------------
Total.................................................................... 11,992 8,150
------------- -------------
Marketable securities available for sale.......................................... 3,490 1,518
Deferred income tax assets........................................................ 4,607 1,578
Capitalized product development costs - net of accumulated amortization of $4,858
at September 30, 1999 and $3,482 at December 31, 1998.......................... 5,071 4,136
Intangible assets - net of accumulated amortization of $1,211 at September 30,
1999 and $225 at December 31, 1998............................................. 20,904 2,805
Other assets...................................................................... 446 146
------------- -------------
Total........................................................................ $109,928 $83,005
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable............................................................. $5,046 $7,914
Accrued incentive............................................................ 1,357 1,710
Income taxes payable......................................................... - 1,823
Accrued vacation............................................................. 1,078 818
Other accrued liabilities.................................................... 4,406 1,498
------------- -------------
Total current liabilities................................................ 11,887 13,763
Deferred rent and other........................................................... 2,247 1,288
------------- -------------
Total liabilities............................................................ 14,134 15,051
------------- -------------
Stockholders' equity:
Preferred stock - $.001 par value; 10,000,000 shares authorized; none issued
and outstanding............................................................. -- --
Common stock - $.001 par value; 20,000,000 shares authorized; 13,548,151
shares issued and 13,520,826 shares outstanding at September 30, 1999; and
12,919,187 shares issued and 12,880,862 shares outstanding at
December 31, 1998.......................................................... 82,210 66,002
Treasury stock; 27,325 shares at September 30, 1999 and at 38,325
December 31, 1998.......................................................... (526) (740)
Accumulated other comprehensive earnings - unrealized gain (loss) on
investments................................................................ (80) 63
Retained earnings............................................................ 14,190 2,629
------------- -------------
Total Stockholders' equity............................................... 95,794 67,954
------------- -------------
Total........................................................................ $109,928 $83,005
============== =============
</TABLE>
See notes to Consolidated financial statements.
3
<PAGE>
QRS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues ......................................................... $32,389 $23,618 $91,273 $64,482
Cost of revenues.................................................. 16,902 13,319 47,076 36,258
----------- ----------- ----------- -----------
Gross profit...................................................... 15,487 10,299 44,197 28,224
Operating expenses:
Sales and marketing.......................................... 3,617 2,881 11,870 8,247
Product development.......................................... 2,551 1,187 6,635 3,077
General and administrative................................... 2,957 1,823 8,224 5,054
In-process research and development.......................... 963 967 963 967
----------- ----------- ----------- ----------
Total operating expenses................................. 10,088 6,858 27,692 17,345
----------- ----------- ----------- -----------
Operating earnings................................................ 5,399 3,441 16,505 10,879
Interest income................................................... 468 545 1,525 1,644
----------- ----------- ----------- -----------
Earnings from continuing operations before income taxes........... 5,867 3,986 18,030 12,523
Income taxes...................................................... 2,205 1,515 6,826 4,930
----------- ----------- ----------- -----------
Earnings from continuing operations after income taxes............ 3,662 2,471 11,204 7,593
Discontinued operations:
Gain from sale of software and services business............. -- -- -- 896
----------- ----------- ----------- -----------
Net earnings...................................................... 3,662 2,471 11,204 8,489
----------- ----------- ----------- -----------
Other comprehensive earnings:
Unrealized gain (loss) from marketable securities
available for sale......................................... (29) 68 (143) 166
----------- ----------- ----------- -----------
Total comprehensive earnings...................................... $3,633 $2,539 $11,061 $8,655
=========== =========== =========== ===========
Basic earnings per share:
Continuing operations........................................ $0.27 $0.19 $0.85 $0.59
Discontinued operations...................................... -- -- -- 0.07
----------- ----------- ----------- -----------
Net earnings per share....................................... $0.27 $0.19 $0.85 $0.66
=========== =========== =========== ===========
Shares used to compute basic earnings per share................... 13,471,029 12,795,773 13,243,357 12,808,859
=========== =========== =========== ===========
Diluted earnings per share:
Continuing operations........................................ $0.26 $0.19 $0.80 $0.57
Discontinued operations...................................... -- -- -- 0.07
----------- ----------- ----------- -----------
Net earnings per share....................................... $0.26 $0.19 $0.80 $0.64
=========== =========== =========== ===========
Shares used to compute diluted earnings per share................. 14,291,826 13,102,047 14,041,491 13,275,722
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
QRS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Operating activities:
Net earnings..................................................................... $11,204 $8,489
Adjustment to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization................................................ 5,329 2,427
In-process research and development.......................................... 963 967
Gain from sale of software and services business............................. - (896)
Loss on disposal of assets................................................... 92 -
Changes in:
Accounts receivable.......................................................... (815) (3,514)
Prepaid expenses and other................................................... (368) 22
Deferred income tax assets................................................... 2,544 867
Intangible and other assets.................................................. (606) (283)
Accounts payable............................................................. (2,868) 4,493
Deferred rent and other...................................................... (41) 578
Income taxes payable ........................................................ (1,823) 222
Other accrued liabilities.................................................... 247 (717)
------------- -------------
Net cash provided by operating activities.................................... 13,858 12,655
------------- -------------
Investing activities:
Sales (purchases) of marketable securities - available for sale (net)............ (8,603) 10,645
Purchase of property and equipment............................................... (6,689) (2,389)
Capitalization of product development costs...................................... (2,311) (1,872)
Acquisition of businesses, net of cash acquired and stock issued................. (14,840) (2,927)
------------- -------------
Net cash provided by (used in) investing activities.......................... (32,443) 3,457
------------- -------------
Financing activities:
Exercise of stock options........................................................ 8,427 255
Exercise of stock warrants....................................................... 25 -
Contributions from minority interest............................................. 125 -
Purchase of fractional shares from stock split................................... (9) -
Purchase of treasury stock....................................................... - (1,837)
------------- -------------
Net cash provided by (used in) financing activities.......................... 8,568 (1,582)
------------- -------------
Net increase (decrease) in cash and cash equivalents.................................. (10,017) 14,530
Cash and cash equivalents at beginning of period...................................... 36,642 16,091
------------- -------------
Cash and cash equivalents at end of period............................................ $26,625 $30,621
============= =============
Other cash flow information:
Taxes paid during the period..................................................... $6,130 $3,514
============= =============
Noncash financing activities:
Tax benefit from stock options exercised......................................... $5,573 $212
Unrealized gain (loss) on investments............................................ (143) 166
On July 23, 1999, we acquired the outstanding common shares of Retail Data
Services and its affiliate, RDS, Inc. During the third quarter of 1998, We
acquired the assets of Custom Information Systems Corporation and the
outstanding common shares of The EDI Connection. The purchase price was
allocated, as follows:
Working capital other than cash.................................................. $(1,329) $(71)
Property and equipment........................................................... 212 110
Goodwill......................................................................... 7,588 736
Other intangible assets.......................................................... 11,169 1,987
In-process research and development ............................................. 963 967
Other non-current liability...................................................... (1,000) --
Less: Common stock issued in connection with acquisitions........................ (2,763) (802)
------------- -------------
Acquisitions, net of cash acquired of $160 and $23 and stock issued.............. $14,840 $2,927
============= =============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
Effective May 11, 1998, QuickResponse Services, Inc. changed its
corporate name to QRS Corporation.
Our products and services are organized and managed as a single product
family, including Electronic Commerce Services, such as messaging,
service bureau, outsourcing and connectivity; Content Services,
consisting primarily of the Keystone catalog service; and Application
Services, such as price auditing, inventory management (IMS), and
logistics management (LMS) services. We derive revenues from three
principal and related sources: fees for utilization of network services
including the transmission of standard business documents over a
network, monthly charges for accessing content services, and
subscription and usage fees for application services.
On July 13, 1999, we formed a wholly owned United States subsidiary,
eMatch, Inc., a Delaware corporation.
The consolidated balance sheet as of September 30, 1999, the
consolidated statements of earnings and comprehensive earnings and the
consolidated statements of cash flows for the three and nine months
ended September 30, 1999 and 1998, have been prepared by us without
audit. In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at September 30, 1999 and
for all periods presented have been made. The consolidated balance sheet
as of December 31, 1998 is derived from our audited consolidated
financial statements as of that date.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted as permitted by
regulations of the Securities and Exchange Commission. It is suggested
that these interim consolidated financial statements be read in
conjunction with the annual audited consolidated financial statements
and notes thereto included in Our Form 10-K for the year ended December
31, 1998.
The preparation of our consolidated financial statements in conformity
with generally accepted accounting principles necessarily requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the balance sheet dates and the reported amounts of
revenues and expenses for the periods presented. Actual amounts may
differ from such estimates.
The results of operations for the periods ended September 30, 1999 and
1998 are not necessarily indicative of the operating results anticipated
for the full year.
Certain reclassifications have been made to the 1998 amounts to conform
to the 1999 presentation.
2. ACQUISITIONS
On July 23, 1999, we completed the acquisition of all the outstanding
capital stock of Retail Data Services, Inc. and RDS, Inc. (collectively,
"RDS"). The total acquisition cost was $21,183,820; comprised of
$15,000,000 paid in cash; $3,000,000 in deferred compensation to the
seller; 53,250 shares of common stock valued at $2,762,610 of which
11,000 shares of common stock were issued from our treasury account;
liabilities assumed of $171,210 and $250,000 in transaction costs
related to the acquisition. Under the terms of the Agreement, we are
required to pay $2,000,000 and $1,000,000 in March 2000 and 2001,
respectively to the seller if revenue from the acquired business meets
or exceeds certain levels in 1999 and 2000. Management has determined,
based on the results of our analysis that it is highly probable that
revenue from the acquired business will exceed the established levels,
and accordingly, the deferred payments to the seller have been included
in the acquisition cost. The acquisition was accounted for as a purchase
transaction.
The purchase price has been allocated to the acquired assets and assumed
liabilities on the basis of their estimated fair values as of the date
of the acquisition, as determined by an independent appraisal. The
financial statements reflect the preliminary allocation of the purchase
price, as estimates of certain direct costs and liabilities associated
with the transaction have not yet been finalized. The fair value of the
6
<PAGE>
assets acquired and liabilities assumed, based on the preliminary
allocation of the purchase price, is summarized as follows (in
thousands):
<TABLE>
<S> <C>
Cash.................................................................... $15,000
Estimated fair value of common stock issued.............................. 2,763
Accrued transaction costs................................................ 250
Deferred compensation to seller.......................................... 3,000
-----------
Total purchase price........................................... $21,013
===========
Preliminary allocation of purchase price:
Goodwill............................................................... $7,588
Current technology..................................................... 4,190
Customers list and trademark........................................... 3,757
Fair value of other intangible assets.................................. 1,687
Assembled workforce.................................................... 1,535
In-process research and development.................................... 963
Accounts receivable.................................................... 1,092
Property and equipment................................................. 212
Cash................................................................... 160
Liabilities assumed.................................................... (171)
-----------
Total allocation of purchase price............................... $21,013
===========
</TABLE>
The amount allocated to in-process research and development of $963,000
was charged to expense during the three and nine months ended September
30, 1999 as no alternative future uses existed for the research
projects at the acquisition date.
The following unaudited pro forma financial results of QRS and RDS for
the nine month period ended September 30, 1999 and 1998 give effect to
the acquisition of RDS as if the acquisition had occurred on January 1,
1999 (the first day of fiscal 1999) and January 1, 1998, (the first day
of fiscal 1998) and includes adjustments (amortization of goodwill,
in-process research and development charge, decrease in interest income
from the use of cash and the related income tax adjustments) directly
attributable to the acquisition and expected to have a continuing
impact on the combined company. The unaudited pro forma financial
information has been prepared based on preliminary estimates of certain
direct costs and liabilities associated with the transaction, and
amounts actually recorded may change upon final determination of such
amounts. Specifically, additional information is expected to be
obtained for accrued expenses related to the acquisition.
The unaudited pro forma financial results are provided for comparative
purposes only and are not necessarily indicative of what our actual
results would have been had the forgoing transaction been consummated
on such dates, nor does it give effect to the synergies, cost savings
and other charges expected to result from the acquisition. Accordingly,
the pro forma financial results do not purport to be indicative of our
results of operations as of the date hereof or for any period ended on
the date hereof or for any other future date or period.
7
<PAGE>
Unaudited Pro Forma Financial Information (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1999 1998
----------- ----------
<S> <C> <C>
Revenues................................................. $ 96,493 $ 70,545
Earnings from continuing operations...................... 9,403 5,823
Discontinued operations.................................. - 896
----------- ----------
Net earnings............................................. $ 9,403 $ 6,719
=========== ==========
Earnings per share - basic:
Earnings from continuing operations...................... $ 0.71 $ 0.45
Discontinued operations.................................. - 0.07
----------- ----------
Net earnings............................................. $ 0.71 $ 0.52
= ========= ==========
Shares used to compute basic earnings per share.......... 13,283,148 12,862,109
============ ==========
Earnings per share - diluted:
Earnings from continuing operations...................... $ 0.67 $ 0.44
Discontinued operations.................................. - 0.07
----------- ----------
Net earnings............................................. $ 0.67 $ 0.51
=========== ==========
Shares used to compute diluted earnings per share........ 14,081,282 13,328,972
=========== ==========
</TABLE>
Basic and diluted pro forma earnings per share was calculated based on
our outstanding common stock at September 30, 1999 and 1998, which
reflects a 3 for 2 stock split and 53,250 shares of our common stock
issued in connection with the acquisition of RDS.
During the third quarter of 1998, we acquired the assets of Custom
Information Systems Corporation and the outstanding common shares of
the EDI Connection, both service bureaus. The total acquisition cost
was $4,152,000, comprised of $2,950,000 paid in cash, 35,000 of common
stock valued at $802,000 issued from our treasury stock account,
liabilities assumed of $194,000 and $206,000 in transaction costs
related to the acquisitions. The acquisitions were accounted for as
purchase transactions. In connection with the acquisitions and in
conjunction with our capitalized software policies, $967,000 of the
purchase price was allocated to in-process research and development
and, as technological feasibility had not been established and no
alternative future uses existed at the acquisition dates, charged to
expense. We allocated $3,185,000 of the purchase price to current
assets, property and equipment and intangible assets. The amounts
allocated to current assets and property and equipment were based on
the fair market value of the related assets and the amounts allocated
to intangible assets were determined on the basis of the appraised
value of the related intangible assets. The appraisal techniques
included certain assumptions, including, the extent, character and
utility, the income generating or cost-savings attributes, the nature
and timing of the functional or economic obsolescence and the relative
risk and uncertainty associated with an investment in intangible
assets.
The intangible assets are being amortized using the straight-line
method for periods between three and seven years.
3. SUBLEASE LOSS RESERVES
During the quarter ended March 31, 1998, outstanding matters with
regard to the Uniquest bankruptcy were substantially resolved.
Accordingly, we recognized a gain on sale of software and services
business of $1,494,000 less applicable income taxes of $598,000 during
the nine months ended September 30, 1998. The remaining sublease loss
reserve of $480,000 at March 31, 1998 representing the provisions
established for nonpayment by Uniquest of future sublease obligations
was reclassified to deferred rent and other and is being amortized over
the remaining lease term through June 30, 2010.
8
<PAGE>
4. STOCK OPTIONS AND WARRANTS
During the first nine months of 1999, we granted options to purchase
367,325 shares of common stock. Options to purchase 571,898 shares of
common stock were exercised with proceeds to the Company of $8,427,000.
At September 30, 1999, 2,153,460 shares were subject to outstanding
options, of which 706,284 shares were exercisable. On February 15, 1999,
the Board of Directors authorized an increase in the number of shares of
common stock available for issuance under the 1997 Special Non-Officer
Stock Option Plan from 225,000 to 450,000. On May 11, 1999, the
stockholders approved additional allocations of 600,000 shares of common
stock to the stock option pool under the 1993 Stock Option/Stock
Issuance Plan. As of September 30, 1999, stock options to purchase
approximately 642,520 shares of common stock were available for future
grant under our 1993 Stock Option/Stock Issuance Plan and the 1997
Special Non-Officer Stock Option Plan.
Warrants issued in connection with a line of credit to purchase 10,134
shares of common stock at $12.33 per share were outstanding at September
30, 1999. These warrants expire upon 30-day notification of the warrant
holder. During the quarter ended June 30, 1999, warrants issued in
connection with the public offering to purchase 15,000 shares of common
stock were exercised.
5. EARNINGS PER SHARE
We calculate basic earnings per share (EPS) and diluted EPS in
accordance with SFAS No. 128 "Earnings per Share". Basic EPS is
calculated by dividing net earnings for the period by the weighted
average common shares outstanding for that period. Diluted EPS takes
into account the effect of dilutive instruments, such as stock options,
and uses the average share price for the period in determining the
number of incremental shares that are to be added to the weighted
average number of shares outstanding.
The following is a summary of the calculation of the number of shares
used in calculating basic and diluted EPS:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1999 1998 1999 1998
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Shares used to compute basic EPS 13,471,029 12,795,773 13,243,357 12,808,859
Add: effect of dilutive securities 820,797 306,274 798,134 466,863
-------------- ------------- -------------- -------------
Shares used to compute diluted EPS 14,291,826 13,102,047 14,041,491 13,275,722
============== ============= ============== =============
</TABLE>
On June 10, 1999, our Board of Directors authorized a three-for-two
split of our common stock for our stockholders of record as of June 21,
1999. All share and per share amounts have been restated to
retroactively reflect the stock split.
6. TREASURY STOCK
On April 22, 1997, we announced that our Board of Directors has
authorized the repurchase from time to time of up to $5 million of our
common stock in both open market and block transactions. The Board of
Directors authorized a $5 million increase in this repurchase amount on
October 16, 1998. Shares purchased under this program will be held in
the corporate treasury for future use including employee stock option
grants and the employee stock purchase plan. We may discontinue
purchases of our common stock at any time that management determines
additional purchases are not warranted. During the first nine months of
1999, we did not repurchase any shares of common stock. We have
repurchased 90,825 shares since the inception of the buyback program, of
which 88,875 shares were repurchased during 1998 for $1,837,000. During
the third quarter of 1998, we reissued 52,500 shares of treasury stock
valued at $802,000 in connection with the acquisition of businesses. On
July 23, 1999, we reissued 11,000 shares of treasury stock valued at
$571,000 in connection with the acquisition of RDS.
9
<PAGE>
7. COMMITMENTS
Currently, our headquarters facility and data center is located in
Richmond, California. We have leases and lease extensions to cover space
expansion until June 30, 2010. Additionally, we lease office space in
Torrance, California and New York, New York for two service bureaus and
in Richmond, Virginia for our operations acquired from Retail Data
Services. Finally, Tradeweave entered into a five-year lease commencing
October 1, 1999 for approximately 20,000 square feet of office space in
the south of Market Steet area of San Francisco, California.
Effective July 1, 1999, the Retail Management and Business Partner
Agreements with IBM were modified and the termination dates were
extended by one year to December 31, 2001. The minimum gross revenue
commitment for the term of the contracts was increased from
$250,000,000 to $335,000,000 in consideration of an increase in the
applicable discounts and an increase in professional fees. We recognized
professional fee revenue of $875,000 and $750,000 for the nine months
ended September 30, 1999 and 1998, respectively .
8. SUBSEQUENT EVENTS
On October 22, 1999 eMatch changed its corporate name to Tradeweave,
Inc. a Delaware corporation.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS, WHICH INVOLVE RISKS
AND UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF
INTENSE COMPETITION IN THE ELECTRONIC COMMERCE BUSINESS, OUR DEPENDENCE
ON KEY RETAILERS, OUR ABILITY TO SUCCESSFULLY INTRODUCE NEW PRODUCTS AND
SERVICES, OUR DEPENDENCE ON THE AT&T/IBM GLOBAL NETWORK AND OTHER RISK
FACTORS SET FORTH IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1998. IN ADDITION, WE COMPLETED THE ACQUISITION OF RDS ON
JULY 23, 1999, WHICH AFFECTS THE COMPARABILITY OF OUR FINANCIAL RESULTS
(SEE NOTE 2 TO CONSOLIDATED FINANCIAL STATEMENTS).
GENERAL
QRS Corporation's products and services are organized and managed as a
single product family, which includes electronic commerce services,
content services, and applications services. We derive revenues from
three principal and related sources: fees for utilization of network
services including the transmission of standard business documents over
a network primarily based on the volume of characters transmitted,
charges for accessing catalog services, and subscription and usage fees
for application services.
RESULTS OF OPERATIONS
Our revenues increased by 37% to $32.4 million for the third quarter of
1999, from $23.6 million for the third quarter of 1998. Our revenues
increased by 42% to $91.3 million during the first nine months of 1999,
from $64.5 million for the first nine months of 1998. This increase was
primarily attributable to an increased number of customers, higher usage
of eCommerce and content services, pricing adjustments, additional
primetime usage and enhancements to our services. The number of
customers increased from 7,427 (231 retailers and 7,196 vendors and
carriers) as of September 30, 1998 to 8,430 (389 retailers and 8,041
vendors and carriers) as of September 30, 1999. The number of catalog
trading partnerships increased as a result of the increase in the number
of customers and their trading links with each other. Customers
increased the number, type and size of transactions transmitted over the
network, as well as the utilization of content services. We expanded our
service offerings in eCommerce, content and application services.
Cost of revenues consists primarily of the cost of purchasing network
services and the cost of our data center and technical customer support
services. Cost of revenues increased by 27%, to $16.9 million for the
third quarter of 1999, from $13.3 million for the third quarter of 1998.
Cost of revenues increased by 30% to $47.1 million for the first nine
months of 1999, from $36.3 million for the first nine months of 1998.
The increase was principally due to increases in purchased network
services, reflecting growth in network services purchased under a
long-term contract, discounted based upon a multi-year volume
commitment, and an expanded customer support group reflecting growth in
customers and products. The gross profit margin was 48% and 44% for the
third quarter of 1999 and 1998, respectively. The margin improvement is
due to higher yield improvements and improved pricing on purchased
network services partially offset by technical infrastructure
expenditures to support newer services.
Sales and marketing expenses consist primarily of personnel and related
costs in our sales and marketing organizations, as well as the costs of
various marketing programs. Sales and marketing expenses increased by
26% to $3.6 million for the third quarter of 1999, from $2.9 million for
the third quarter of 1998. Sales and marketing expenses increased by 44%
to $11.9 million for the first nine months of 1999, from $8.2 million
for the first nine months of 1998. This increase reflects our expansion
of retailer and vendor-specific coverage and growth in our Program Sales
and Enablement organization, the group responsible for rapidly enabling
trading partners for key hub customers.
Product development expenses consist primarily of personnel and
equipment costs related to research, development and implementation of
new services and enhancement of existing services. Product development
expenses were $2.6 million for the third quarter of 1999 and $1.2
million for the third quarter of 1998. Product development expenses were
$6.6 million for the first nine months of 1999 and $3.1 million for the
first nine months of 1998. The increase was primarily attributable to
the development and enhancement of our content and application services.
We capitalized product development costs of $1.3 million and $588,000
for the third quarter of 1999 and 1998, respectively. We capitalized
product development costs of $2.3 million and $1.9 million for the first
nine months of 1999 and 1998, respectively. The change in capitalized
product development costs in 1999 reflects significantly higher
11
<PAGE>
research and development activities for new products or products that
had reached technological feasibility.
General and administrative expenses consist primarily of the personnel
and related costs of our finance and administrative organizations, as
well as professional fees and other costs. General and administrative
expenses increased by 62%, to $3.0 million for the third quarter of
1999, from $1.8 million for the third quarter of 1998. General and
administrative expenses increased by 63% to $8.2 million for the first
nine months of 1999, from $5.1 million for the first nine months of
1998. This increase was primarily due to increased investments in
infrastructure and increased headcount to support a larger organization.
On July 23, 1999, we completed the acquisition of all the outstanding
capital stock of Retail Data Services, Inc. and RDS, Inc. (collectively,
"RDS"). The total acquisition cost was $21.2 million; comprised of $15.0
million paid in cash; $3.0 million in deferred compensation to the
seller; 53,250 shares of common stock valued at $2.8 million of which
11,000 shares of common stock were issued from our treasury account;
liabilities assumed of $171,000 and $250,000 in transaction costs
related to the acquisition. Under the terms of the Agreement, we are
required to pay $2.0 million and $1.0 million in March 2000 and 2001,
respectively to the seller if revenue from the acquired business meets
or exceeds certain levels in 1999 and 2000. Management has determined,
based on the results of our analysis that it is highly probable that
revenue from the acquired business will exceed the established levels,
and accordingly, the deferred payments to the seller have been included
in the acquisition cost. The acquisition cost was allocated to the
estimated fair value of assets acquired based on an independent
appraisal and reflects the write-off of $963,000 of in-process research
and development as no alternative future uses existed for these research
projects at the acquisition date. The acquisition was accounted for as a
purchase transaction.
During the third quarter of 1998, we acquired the assets of Custom
Information Systems Corporation and the outstanding common shares of the
EDI Connection, both service bureaus. The total acquisition cost was
$4.2 million, comprised of $3.0 million paid in cash, 35,000 of common
shares valued at $802,000 issued from the treasury stock account,
liabilities assumed of $194,000 and $206,000 in transaction costs
related to the acquisitions. The acquisitions were accounted for as
purchase transactions. In connection with the acquisitions and in
conjunction with our capitalized software policies, $967,000 of the
purchase price was allocated to in-process research and development and,
as technological feasibility had not been established and no alternative
future uses existed at the acquisition dates, charged to operations. We
allocated $3,185,000 of the purchase price to current assets, property
and equipment and intangible assets. The amounts allocated to current
assets and property and equipment were based on the fair market value of
the related assets and the amounts allocated to intangible assets were
determined on the basis of the appraised value of the related intangible
assets. The appraisal techniques included certain assumptions,
including, the extent, character and utility, the income generating or
cost-savings attributes, the nature and timing of the functional or
economic obsolescence and the relative risk and uncertainty associated
with an investment in intangible assets.
Interest income consists primarily of interest earned on cash, cash
equivalents and investment securities. Interest income was $468,000 and
$545,000 for the third quarter of 1999 and 1998, and $1.5 million and
$1.6 million for the first nine months of 1999 and 1998, respectively.
Changes in interest income reflect the level of average investment
balances in each period and a shift from taxable to non-taxable
marketable securities. On July 23, 1999, we utilized $15.0 million in
cash to acquire RDS and during the third quarter of 1998 we utilized
$3.0 million in cash to acquire The EDI Connection and Custom
Information Systems Corporation, both service bureaus.
As a result of the foregoing, earnings from continuing operations before
income taxes increased by 47% to $5.9 million for the third quarter of
1999, from $4.0 million for the third quarter of 1998. Earnings from
continuing operations before income taxes increased by 44% to $18.0
million for the first nine months of 1999, from $12.5 million for the
first nine months of 1998.
Income taxes were $2.2 million and $1.5 million for the third quarter of
1999 and 1998, respectively. Income taxes were $6.8 million and $4.9
million for the first nine months of 1999 and 1998, respectively. The
1998 income tax rate for the first six months of 40% approximates the
combined effective federal and state income tax rates. The income tax
rate forward from the third quarter of 1998 of 38% approximates the
combined effective federal and state income tax rates and is expected to
be effective for 1999.
12
<PAGE>
During the first quarter of 1998, outstanding matters with regard to the
bankruptcy proceedings of the purchaser of our software and services
business were substantially resolved; accordingly, we recognized a $1.5
million gain on sale of software and services business, net of
applicable income taxes of $600,000 for the first nine months of 1998.
As a result of the foregoing, net earnings increased by 48% to $3.7
million for the third quarter of 1999, from $2.5 million for the third
quarter of 1998. Net earnings increased by 32% to $11.2 million for the
first nine months of 1999, from $8.5 million for the nine months of
1998.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital increased from $50.9 million at December 31, 1998 to
$51.7 million at September 30, 1999 primarily due to net positive cash
flow from operations, which was partially offset by $15.0 million in
cash used to purchase RDS. Cash, cash equivalents and marketable
securities decreased from $45.1 million at December 31, 1998 to $43.6
million at September 30, 1999. Total assets increased from $83.0 million
at December 31, 1998 to $109.9 million at September 30, 1999 and total
liabilities decreased from $15.1 million at December 31, 1998 to $14.0
million at September 30, 1999.
The decrease of $1.5 million in cash, cash equivalents and marketable
securities from December 31, 1998 to September 30, 1999 resulted
primarily from the use of $15.0 in cash to purchase RDS, net of positive
cash flow from operations as well as exercise of stock options.
On April 22, 1997, we announced that our Board of Directors has
authorized the repurchase from time to time of up to $5 million of our
common stock in both open market and block transactions. The Board of
Directors authorized a $5 million increase in this repurchase amount on
October 16, 1998. Shares purchased under this program will be held in
the corporate treasury for future use including employee stock option
grants and the employee stock purchase plan. We may discontinue
purchases of our common stock at any time that management determines
additional purchases are not warranted. We did not repurchase any of
our common stock during the nine months ended September 30, 1999.
Management believes that the cash resources available at September 30,
1999 and cash anticipated to be generated from future operations will be
sufficient to meet our working capital needs, capital expenditures and
common stock repurchases for the next year. We have not paid any cash
dividends to date and do not intend to pay cash dividends with respect
to common stock in the foreseeable future.
YEAR 2000 READINESS
INTRODUCTION - The Year 2000 issue involves computer programs and
embedded microprocessors in computer systems and other equipment that
utilize two digits rather than four to define the applicable year. These
systems may be programmed to assume that all two digit dates are
preceded by "19," causing "00" to be interpreted as 1900 rather than
2000. This could result in the possible failure of those programs and
devices to properly recognize date sensitive information when the year
changes to 2000. Systems that do not properly recognize date sensitive
information could generate erroneous data or a system failure. The
following discussion regarding Year 2000 matters constitutes a "Year
2000 Readiness Disclosure" within the meaning of the Year 2000
Information and Readiness Disclosure Act.
We have conducted an evaluation of the actions necessary to confirm that
our business critical computer and other systems will be able to
function without disruption with respect to the application of dating
systems in the Year 2000. This evaluation was conducted with the
assistance of consulting services. The completed deliverable from that
review is a detailed Year 2000 readiness plan.
Our plan objective is to achieve an uninterrupted transition into the
Year 2000. The scope of the Year 2000 plan includes: (1) information
technology ("IT") such as software and hardware, (2) non-IT systems or
embedded technology such as micro-controllers contained in various
safety systems, facilities and utilities, and (3) readiness of key third
parties, including suppliers and customers. Our remedial actions are
scheduled for completion in the fourth quarter of 1999. However, there
can be no assurance that the remedial actions being implemented will be
completed by the time necessary to avoid Year 2000 compliance problems.
13
<PAGE>
INFORMATION TECHNOLOGY SYSTEMS - Based on this evaluation, we are
upgrading, replacing, and testing many of our IT systems to achieve Year
2000 readiness. Because we were founded 11 years ago, we believe that
our mainframe systems are largely Year 2000 capable, and that upgrading
our PC and midrange based systems will require most of our attention.
NON INFORMATION TECHNOLOGY SYSTEMS - We believe that our non-information
technology Year 2000 exposure is relatively low, since our product
delivery is primarily executed through modern computer equipment and
related technology that does not have dated, embedded chip deployment.
PRODUCT AND SERVICE OFFERINGS - We have completed a Year 2000 assessment
of our currently offered products and services. Based on this assessment
and remediation completed through the third quarter of 1999, we believe
that our currently offered products and electronic commerce services are
Year 2000 ready, or will be ready by December 15, 1999 through new
product releases or modifications to internal systems. We believe that a
small percentage of our customers who receive product support from us
are operating product versions that may not be Year 2000 ready or
products or product versions that we have replaced or intend to replace
with comparable Year 2000 ready products. We believe that the majority
of these customers are migrating and will continue to migrate to Year
2000 ready versions and products through new releases, which we are
strongly encouraging. We do not believe that customers who license or
migrate to Year 2000 ready versions of our products, or customers who
purchase our electronic commerce services, will experience any Year 2000
failures caused by such products or services. However, there can be no
assurance that our expectations and beliefs as to these matters will
prove to be accurate. Moreover, our products employ, and the provision
of our services requires the use of, systems comprised of third-party
hardware and software, some of which may not be Year 2000 ready.
THIRD PARTY READINESS - We have a process in place to assess the Year
2000 readiness of our business critical vendors and customers, and are
working with these vendors and customers on Year 2000 readiness issues.
There can be no assurances that the systems of other parties upon which
we rely will be made Year 2000 ready on a timely basis. We utilize third
party vendor equipment, telecommunications products and software
products. Disruptions with respect to computer systems of vendors or
customers, whose systems are outside our control, could impair our
ability to provide services to our customers, and could have a material
adverse effect upon our financial condition and results of operations,
or require us to incur unanticipated expenses to remedy any problems.
COSTS - We expended approximately $425,000 in 1998 and $2.0 million
during the nine months ended September 30, 1999 on activities to prepare
for Year 2000 readiness. Approximately $155,000 and $300,000,
respectively, was for assessments and customer notification, and
$270,000 and $1.7 million respectively, was for testing and product and
infrastructure modifications. We currently estimate that we will expend
an additional $300,000, budgeted primarily under our Information
Technology division, prior to January 1, 2000, to modify our in-house
information systems, other systems and internally developed software
products affected by the Year 2000 issue. We estimate that of the
remaining costs, 5% will be for assessment and customer notification and
95% will be for testing and modifications. Total Year 2000 readiness
costs have increased due to additional work scope. All costs associated
with Year 2000 compliance are being funded with cash flow generated from
operations and existing cash balances and are being expensed as
incurred.
ADDITIONAL RISKS - Additional aspects of the Year 2000 issue may pose
risks to be considered in evaluating our future growth. Some
commentators predict that normal purchasing patterns and trends in the
industry may be affected by customers replacing or upgrading
applications or systems to address the Year 2000 issue. We have not
experienced any discernable trend indicating a recent or impending
material reduction in demand for our products and services. Furthermore,
some commentators have also predicted that a significant amount of
litigation may arise out of Year 2000 readiness issues. While we have
not been subject to any Year 2000 claims or lawsuits to date, there can
be no assurance that current or former customers will not bring claims
or lawsuits against us seeking compensation for losses associated with
Year 2000 related failures. A material adverse outcome in a Year 2000
claim or lawsuit could have a material adverse effect on our business,
financial condition and results of operations.
CONTINGENCY PLANING - We are developing contingency plans to address
those business critical systems that may not be Year 2000 ready, in the
event we are unable to complete our remedial actions in the planned time
frame.
14
<PAGE>
We believe that the most reasonably likely worst case scenario is that a
small number of vendors and/or customers will have lingering Year 2000
compliance problems, resulting in additional support for these
customers, and the substitution of a higher number of software vendors
than currently anticipated. As a part of the assessment process, we will
develop contingency plans for those business critical vendors or large
customers who are either unable or unwilling to develop remedial plans
to become Year 2000 ready. We expect that these plans will involve the
acceleration of our Year 2000 readiness activity and the application of
additional resources. It is expected that these contingency plans will
be in place by December 1999.
15
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Our exposure to market risk associated with changes in interest rates relates
primarily to our investment portfolio of marketable securities. We do not use
derivative financial instruments in our investment portfolio. The stated
objectives of our investment guidelines are to preserve principal, meet
liquidity needs and deliver maximum yield subject to the previous conditions.
The guidelines limit maturity, limit concentration, and limit eligible
investments to high credit quality U.S. issuers, such as the U.S. Treasuries and
agencies of the U.S. Government, and highly rated banks and corporations. Our
marketable securities profile includes only those securities with active
secondary or resale markets to ensure portfolio liquidity.
The table below presents principal amounts and related weighted average interest
rates due by date of maturity for our marketable securities. Our guidelines do
not permit investments with maturities in excess of 24 months. At September 30,
1999, the weighted average maturity and interest rate of the marketable
securities portfolio was 255 days and 4.12%, and the cost and the fair value of
the marketable securities were $17,030,000 and $16,954,000, respectively. The
marketable securities mature in year 2000.
<TABLE>
<CAPTION>
MATURITY
-------------------- FAIR VALUE AT
(Amounts in thousands) 1999 2000 TOTAL SEPTEMBER 30, 1999
- ------------------------------- ------- ------- -------- -------------------
<S> <C> <C> <C> <C>
Corporate Bonds $ 0 $ 0 $ 0 $ 0
Average interest rate 0.00% 0.00% 0.00%
Government Agencies $ 0 $17,030 $17,030 $16,954
Average interest rate 0.00% 4.12% 4.12%
----- ------- ------- -------
Total Investment Portfolio $ 0 $17,030 $17,030 $16,954
----- ------- ------- =======
Average interest rate 0.00% 4.12% 4.12%
===== ======= =======
</TABLE>
FOREIGN CURRENCY RISK
We have no significant investments outside the United States and do not have
material foreign currency risk.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 23, 1999, we issued 53,250 shares of our common stock
of which 11,000 shares of common stock were issued from our
treasury account. On August 20, 1999, we filed a registration
statement on Form S-3 with the Securities and Exchange
Commission to permit the resale of the outstanding shares
issued in connection with the acquisition of RDS.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
10.53 # Letter Amendment to International Business Partner
Agreement and Change Authorization to Retail Management
Agreement dated August 31, 1999 between Registrant and
International Business Machines Corporation.
27.1 Financial Data Schedule
# Confidential treatment has been granted with respect to portions of this
document
B. REPORTS ON FORM 8-K
We filed a Current Report on Form 8-K dated July 23, 1999
describing, pursuant to Item 2, an agreement to acquire all of
the issued and outstanding shares of RDS, and its affiliate,
RDS Inc. On October 5, 1999, we filed an amendment to the Form
8-K, which included, pursuant to Item 7, the financial
statements of RDS and pro forma information.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized and in the capacity indicated.
QRS CORPORATION
-------------------------------------
(Registrant)
\s\ John S. Simon
-------------------------------------
November 15, 1999 John S. Simon
Chief Executive Officer
\s\ Shawn M. O'Connor
-------------------------------------
November 15, 1999 Shawn M. O'Connor
President and Chief Operating Officer
\s\ Peter Papano
-------------------------------------
November 15, 1999 Peter Papano
Chief Financial Officer and Secretary
18
<PAGE>
[IBM LETTERHEAD]
August 31, 1999
Shawn O'Connor
President and COO
QRS Corporation
1400 Marina Way South
Richmond, CA 94804
Reference: Letter Amendment to International Business Partner Agreement
and Change Authorization to Retail Management Agreement
Dear Shawn:
The attached paragraphs modify the following agreements between QRS
Corporation (QRS) and International Business Machines Corporation (IBM) and
are effective as of July 1, 1999.
Retail Management Agreement, signature effective date 12/31/97 (RMA)
Retail Management Agreement Attachment, signature effective date
12/31/97 (RMA Attachment)
International Business Partner Agreement:
International Solution Provider Profile, signature effective date
12/31/97 (Profile)
IBM Global Services' Network Services Exhibit, marked 17 December
1997 (Exhibit)
IBM and QRS agree that IBM may assign the rights and obligations set
forth in the IBM Business Partner Agreement (including all Profiles,
Attachments and Exhibits) to AT&T Global Network Services (AGNS) with terms
agreed to mutually by IBM, QRS, and AGNS.
Furthermore, if the parties agree to assign certain rights and obligations
related to connectivity services to AGNS so that AGNS assumes those rights and
obligations, IBM will promptly reduce the Minimum Revenue Commitment in the
Profile from $335,000,000 to $275,000,000, and reduce each revenue tier in
the Adjustment Charge table by $60,000,000. Any connectivity revenue
attainment before the assignment will not count toward the Minimum Revenue
Commitment or the Adjustment Charge table as set forth in this paragraph.
Except as explicitly set forth in this letter amendment, all terms,
conditions and provisions of the agreements listed above shall continue in
full force and effect.
<PAGE>
We expect these changes to be of substantial mutual benefit to our
partnership going forward. Please indicate your acceptance of these changes
by signing this letter and returning it to me.
Sincerely,
T. Kevin Massey
Account Executive
Agreed to: Agreed to:
QRS Corporation International Business Machines Corporation
1400 Marina Way South
Richmond, CA 94804 Armonk, New York 10504
By: By:
- ----------------------------------- -----------------------------------
Authorized signature Authorized signature
Name (type or print): Name (type or print):
Date: Date:
Page 2 of 6
<PAGE>
IN THE PROFILE REPLACE THE FOLLOWING:
CONTRACT START DATE: January 1, 1998 DURATION: 3 years
This Agreement shall commence on January 1, 1998, and terminate on 31
December 2000.
WITH THE FOLLOWING:
CONTRACT START DATE: January 1, 1998 DURATION: 4 years
This Agreement shall commence on January 1, 1998, and terminate on 31
December 2001.
IN THE RMA ATTACHMENT REPLACE THE FOLLOWING:
3. TERM
The term of this Attachment shall be from the date of execution of this
Attachment until December 31, 2000. However, this Attachment will be
terminated in the event the Business Partner Agreement between IBM and QRS
is terminated.
WITH THE FOLLOWING:
3. TERM
The term of this Attachment shall be from January 1, 1998 until
December 31, 2001. However, this Attachment will be terminated in the
event the Business Partner Agreement between IBM and QRS is terminated.
Page 3 of 6
<PAGE>
IN THE SECTION 3.1 OF THE EXHIBIT REPLACE THE FOLLOWING TABLE:
<TABLE>
<CAPTION>
REVENUE BY CALENDAR YEAR DISCOUNT PERCENT
1998 1999 2000
<S> <C> <C> <C>
$0.00 - $39,999,999.00
$40,000,000.00 - $59,999,999.00
$60,000,000.00 - $79,999,999.00
Over $80,000,000.00
</TABLE>
WITH THE FOLLOWING TWO TABLES AND PARAGRAPH:
TABLE A:
<TABLE>
<CAPTION>
REVENUE BY CALENDAR YEAR DISCOUNT PERCENT
1998 1st Half 1999
<S> <C> <C>
$0.00 - $39,999,999.00
$40,000,000.00 - $59,999,999.00
$60,000,000.00 - $79,999,999.00
Over $80,000,000.00
</TABLE>
TABLE B:
<TABLE>
<CAPTION>
REVENUE BY CALENDAR YEAR DISCOUNT PERCENT
2nd Half 1999 2000 2001
<S> <C> <C> <C>
$0.00 - $34,999,999.99
$35,000,000 - $49,999,999.99
$50,000,000 - $59,999,999.99
$60,000,000 - $69,999,999.99
$70,000,000 - $89,999,999.99
Over $90,000,000 -
</TABLE>
The discounts for 1999 will be calculated by applying the average discount
from Table A, based on full year attainment, to the actual first half
volumes. In a similar fashion, the average discount from Table B, based on
full year volumes, will be applied to the actual second half volumes.
Page 4 of 6
<PAGE>
IN THE PROFILE REPLACE THE FOLLOWING:
MINIMUM REVENUE COMMITMENT
The minimum gross revenue commitment for the Agreement term is
$250,000,000.00 as follows:
<TABLE>
<CAPTION>
Minimum attainment by end of: Gross Revenue Amount
----------------------------- --------------------
<S> <C>
12 months $ 60,000,000.00
24 months $140,000,000.00
Agreement term $250,000,000.00
</TABLE>
ADJUSTMENT CHARGES
In the event you have not met your $250,000,000 minimum revenue commitment by
the end of the Agreement period, you agree to pay an adjustment charge as
follows:
<TABLE>
<CAPTION>
ACTUAL GROSS REVENUE TO IBM ADJUSTMENT CHARGE
<S> <C>
$250,000,000.00 - $225,000,000.00 1.5% of amount less than $250,000,000.00
$224,999,999.00 - $200,000,000.00 $450,000.00 + 2.0% of amount less than $225,000,000.00
$199,999,999.00 - $150,000,000.00 $950,000.00 + 3.0% of amount less than $200,000,000.00
$149,999,999.00 - $100,000,000.00 $2,450,000.00 + 4.0% of amount less than $150,000,000.00
$ 99,999,999.00 - $0.00 $4,450,000.00 + 5.0% of amount less than $100,000,000.00
</TABLE>
WITH THE FOLLOWING:
MINIMUM REVENUE COMMITMENT
The minimum gross revenue commitment for the Agreement term is
$335,000,000.00 as follows:
<TABLE>
<CAPTION>
Minimum attainment by end of: Gross Revenue Amount
----------------------------- --------------------
<S> <C>
12 months $ 60,000,000.00
24 months $140,000,000.00
36 months $250,000,000.00
Agreement term $335,000,000.00
</TABLE>
In the event you have not met your $335,000,000 minimum revenue commitment by
the end of the Agreement period, you agree to pay an adjustment charge as
follows:
<TABLE>
<CAPTION>
ACTUAL GROSS REVENUE TO IBM ADJUSTMENT CHARGE
<S> <C>
$334,999,999.99 - $310,000,000.00 1.5% of amount less than $335,000,000.00
$309,999,999.99 - $285,000,000.00 $450,000.00 + 2.0% of amount less than $310,000,000.00
$284,999,999.99 - $235,000,000.00 $950,000.00 + 3.0% of amount less than $285,000,000.00
$234,999,999.99 - $185,000,000.00 $2,450,000.00 + 4.0% of amount less than $235,000,000.00
$184,999,999.99 - $0.00 $4,450,000.00 + 5.0% of amount less than $185,000,000.00
</TABLE>
Page 5 of 6
<PAGE>
IN THE RMA ATTACHMENT REPLACE THE FOLLOWING:
9. COMPENSATION
In consideration for the Retail Industry Management Services provided
by QRS, IBM will pay QRS a nonrefundable fee of $1,000,000.00 each
year during the term of this Attachment, payable in installments of
$250,000.00 before the end of the months of April, July, October of the
same year and January of the following year. In the event that this
Agreement is terminated before the end of any calendar year, IBM will
prorate the annual fee for the period of work performed prior to
termination.
WITH THE FOLLOWING:
9. COMPENSATION
In consideration for the Retail Industry Management Services provided
by QRS, IBM will pay QRS a nonrefundable fee each year during the
term of this Attachment, payable in quarterly installments. In the event
that this Agreement is terminated before the end of any calendar year,
IBM will prorate the annual fee for the period of work performed prior
to termination. The payments will take place according to the following
schedule:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
PAYMENT FOR CALENDAR YEAR TO BE PAID BY AMOUNT
MONTH END
-----------------------------------------------------------------------
<S> <C> <C>
1998 Apr 1998 $250,000
-----------------------------------------------------------------------
1998 Jul 1998 $250,000
-----------------------------------------------------------------------
1998 Oct 1998 $250,000
-----------------------------------------------------------------------
1998 Jan 1999 $250,000
-----------------------------------------------------------------------
1999 Apr 1999 $250,000
-----------------------------------------------------------------------
1999 Jul 1999 $250,000
-----------------------------------------------------------------------
1999 Oct 1999 $375,000
-----------------------------------------------------------------------
1999 Jan 2000 $375,000
-----------------------------------------------------------------------
2000 Apr 2000 $437,500
-----------------------------------------------------------------------
2000 Jul 2000 $437,500
-----------------------------------------------------------------------
2000 Oct 2000 $437,500
-----------------------------------------------------------------------
2000 Jan 2001 $437,500
-----------------------------------------------------------------------
2001 Apr 2001 $500,000
-----------------------------------------------------------------------
2001 Jul 2001 $500,000
-----------------------------------------------------------------------
2001 Oct 2001 $500,000
-----------------------------------------------------------------------
2001 Jan 2002 $500,000
-----------------------------------------------------------------------
</TABLE>
IBM and QRS shall negotiate in good faith to enter into an agreement,
documented in writing by October 31, 1999, regarding incentive payments to
IBM. This agreement will provide that QRS shall pay IBM an incentive payment
for IBM's successful assistance in securing a substantial order for any of
the following:
* Dayton Hudson EDI business
* Dayton Hudson catalog endorsement
* Sears North American EDI business
QRS will pay IBM amounts up to $250,000 for each order secured. QRS will make
such payments in the form of a reduction in the quarterly installments due to
QRS under the terms of the Retail Management Agreement.
Page 6 of 6
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
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0
0
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